Revised Auditing Standards Committee Statements (ASCSs) and Quality Control Standards Committee Statement 1 (QCSCS 1) - Comparison with International

Transcription

1 Revised Auditing Standards Committee Statements (ASCSs) and Quality Control Standards Committee Statement 1 (QCSCS 1) - Comparison with International Standards on Auditing (ISAs) and International Standard on Quality Control 1 (ISQC 1) - 18 September, 2013

2 The original texts of Auditing Standards Committee Statements (ASCSs) and Quality Control Standards Committee Statement 1 (QCSCS 1) are prepared in the Japanese language, and the provisional translation and relevant explanation included in this document is to be used solely as reference material to aid in the understanding of the ASCSs and QCSCS 1. For all purposes of interpreting and applying ASCSs and QCSCS 1, users should consult the original Japanese texts available on the following website:

3 Contents Introduction 1. Purpose of this Document Content of this Document... 1 Part I. Overview of Japanese GAAS 1. The Structure of Japanese GAAS Standard to Address Risks of Fraud in an Audit The Revision of Relevant ASCSs and QCSCS 1 Based on the Fraud Risks Standard Other Modifications, including Additional Requirements... 6 Part of the Excerpts of ASCSs and QCSCS 1 A. QCSCS 1 (Revised) Quality Control for Audit Firms... 8 B. ASCS 240 (Revised) The Auditor s Responsibilities Relating to Fraud in an Audit of Financial Statements C. ASCS 900 (Revised) Change of Auditors D. Comparison of Requirements between other ASCSs and ISAs... 60

4 Introduction Introduction 1. Purpose of this Document 1.1 The purpose of this document is to provide the readers with an overview of Auditing Standards Generally Accepted in Japan (Japanese GAAS), by comparing to the clarified International Standards of Auditing (ISAs) and the International Standard on Quality Control 1 (ISQC 1) issued by the International Auditing and Assurance Standards Board (IAASB). 2. Content of this Document 2.1 Part I provides high-level explanation of Japanese GAAS, including the following information: The structure of Auditing Standards Generally Accepted in Japan (1.The Structure of Japanese GAAS); Information regarding additional requirements to ISAs and ISQC 1 ( additional requirements ), which are included in Japanese GAAS (2.Standard to Address Risks of Fraud in an Audit, and 3. The revision of relevant Auditing Standards Committee Statements (ASCSs) and Quality Control Standards Committee Statement 1 (QCSCS 1), based on the Fraud Risk Standard); Information regarding other modifications to requirements of ISAs and ISQC 1 which exist in Japanese GAAS. (4. Other Modifications, including Additional Requirements) 2.2 Part II provides provisional translation of the relevant part of ASCSs and QCSCS 1, to identify key modifications to requirements of ISAs and ISQC 1. This Part consists of four sections as follows: (Section A) QCSCS 1 Quality Control for Audit Firms (Section B) ASCS 240 The Auditor s Responsibilities Relating to Fraud in an Audit of Financial Statements (Section C) ASCS 900 Change of Auditors (Section D) Comparison of Requirements between other ASCSs and ISAs With regard to QCSCS 1, ASCS 240 and ASCS 900, provisional translation of all requirements together with Introduction, Objectives and Definitions sections are provided. 1

5 I. Overview of Japanese GAAS Part I. Overview of Japanese GAAS 1. The Structure of Japanese GAAS 1.1 Auditing standards generally accepted in Japan (Japanese GAAS) consist of the following: Auditing Standards issued by the Business Accounting Council (BAC), an advisory body established within the Financial Services Agency (FSA), which include: The Auditing Standards The Auditing Standards stipulate principles and key concepts about the financial statement audit, agreed among broad stakeholders. Standard to Address Risks of Fraud in an Audit The standard is newly issued on March 26, 2013 (see 2. Standard to Address Risks of Fraud in an Audit). The Standard on Quality Control for Audits The Standard on Quality Control for Audits is required to be applied together with the Auditing Standards. The BAC consists of practitioners as well as non-practitioners including academics, executives of major companies, investors, a representative from the stock exchanges, and is observed by the Ministry of Justice. Auditing Standards Committee Statements (ASCSs) and a Quality Control Standards Committee Statement (QCSCS) issued by the Japanese Institute of Certified Public Accountants (JICPA). The BAC requests the JICPA to develop detailed requirements to implement Auditing Standards issued by the BAC in practice. These requirements, together with relevant application materials, are included in the ASCSs and QCSCS 1. The ASCSs and QCSCS 1 are developed based on Auditing Standards issued by the BAC, and to converge with the clarified International Standards of Auditing (ISAs) and the International Standard on Quality Control 1 (ISQC 1) issued by the International Auditing and Assurance Standards Board (IAASB). 1.2 The JICPA redrafted all ASCSs and QCSCS 1 based on the clarified ISAs and ISQC 1. Clarity ASCSs and QCSCS 1 use the same structure as the clarity ISAs and ISQC 1, (i.e. "Introductions", "Objectives", "Definitions", "Requirements", and "Application and Other Explanatory Material"). 1 Clarified ASCSs and QCSCS 1 are effective for audits of financial statements for period beginning on or after April 1, The list of ASCSs and QCSCS 1 (in English) is available from 2

6 I. Overview of Japanese GAAS 2. Standard to Address Risks of Fraud in an Audit 2.1 Background Over the past few years, several cases of fraudulent financial reporting were identified in documents filed under the requirements of the Financial Instruments and Exchange Act of Japan. Accordingly, since May 2012, the subcommittee on auditing standards of the BAC deliberated on effective audit procedures to address the risk of material misstatements due to fraud, and determined to establish the new standard addressing risks of fraud, so that financial statement audits would be more effective. On March 26, 2013, the BAC published a new standard, Standard to Address Risks of Fraud in an Audit ( the Fraud Risk Standard ). The Fraud Risk Standard consists of following 3 parts. Part I: Emphasis on Professional Skepticism Part II: Conducting the Audit to Address Risks of Fraud Part III: Audit Firm s Quality Control to Address Risks of Fraud The provisional translation of the Standard is available from Applicability of the Fraud Risk Standard The Standard is intended to apply primarily to audits of companies that are required to provide disclosures under the Financial Instruments and Exchange Act (excluding unlisted companies with a stated capital less than 500 million yen or with annual sales less than one billion yen and total liabilities less than 20 billion yen), whose financial statements or the audit report thereon are used by a broad range of users (hereinafter referred to as the publicly traded companies ). Accordingly, the Fraud Risk Standard is only applicable to the audits of listed companies and certain unlisted companies. The scope of application of the Standard is clarified in the relevant laws and regulations. Therefore, unless explicitly required by the relevant laws or regulations, the Standard is not applicable. The Fraud Risk Standard was established as a standard that is separate from the Auditing Standards and the Standard on Quality Control for Audits since: (i) as stated above, the Standard would only be applied if it is required by the relevant laws and regulation, which include the audits of the publicly traded companies, and (ii) it would be more understandable for auditors if the requirements to address the risks of fraud were organized in one standard. 3

7 I. Overview of Japanese GAAS The Fraud Risk Standard is part of Japanese GAAS, together with the Auditing Standards and Standard on Quality Control for Audits, when applicable. In addition, it is necessary for auditors to apply in an integrated manner the Standard together with the ASCSs and QCSCS 1, prepared by the JICPA. 3. The Revision of Relevant ASCSs and QCSCS 1, Based on the Fraud Risk Standard 3.1 Background and the approaches of the revision Based on the Fraud Risks Standard, on June , the JICPA published the revised ASCSs and QCSCS 1 ( the Revised JICPA Statements ). The basic approaches that the JICPA adopted in revising the ASCSs and QCSCS 1 are as follows: In order to maintain the existing structure of the Statements as a whole: - New requirements and relevant application and other explanatory materials are incorporated into the existing Statements, rather than developing a new Statement for the Fraud Risk Standard. - New paragraphs are assigned sub-numbers to the existing paragraphs (i.e ), except for a few cases where the modification to the existing paragraph is needed to implement the relevant provision in the Fraud Risk Standard. Since the Fraud Risk Standard is applied to the audit engagement only if it is required by the relevant laws and regulations, new paragraphs are clearly identified by adding the letter F at the beginning of the paragraph number (i.e. F10-2 ). 4

8 I. Overview of Japanese GAAS 3.2 The Revised JICPA Statements The following Statements were revised based on the Fraud Risk Standard. Some contain new requirements that are the additions to the requirements of ISAs / ISQC 1. Title QCSCS 1 Quality Control for Audit Firms Preface of the Auditing Standards Committee Statement ASCS 200 Overall Objectives of the Financial Statement Audits ASCS 220 Quality Control for an Audit of Financial Statements ASCS 240 The Auditor s Responsibilities Relating to Fraud in an Audit of Financial Statements ASCS 330 The Auditor s Responses to Assessed Risks New Requirement added to the extant statements? / Yes / The firm is required to establish policies and procedures that address the risks of fraud in each element of quality control system. (See II. A on pages 8 to 32) No / The modifications relate only to the guidance that explains the structures of Japanese GAAS. No / The modifications relate only to the guidance that explains the structures of Japanese GAAS Yes / Relevant amendments were made in line with the revision of QCSCS 1. Yes / Several requirements are added to enhance an assessment of and response to the risks of fraud. (See II.B on pages 33 to 52). No / Conforming amendment to the application and explanatory materials only. ASCS 505 External Confirmations Yes / The requirement regarding Non-Responses is enhanced. (See II.D on page 64) ASCS 600 Group Audits ASCS 900 Change of Auditors ASCS 910 Semi Annual Audit Yes / A communication requirement between the group engagement team and the component auditor is added when either auditor identify any circumstances that indicate the possibility of a material misstatement due to fraud relating to the group financial statements.(see II.D on page 67) Yes / Requirements regarding communication of significant matters between predecessor and the successor auditors are enhanced. (See II.C on pages 53 to 59) No / Amendment to the application and explanatory materials only. 5

9 I. Overview of Japanese GAAS 4. Other Modifications, including Additional Requirements 4.1 Other Additional Requirements Other than those relevant to the Fraud Risk Standard above, there are certain additional requirements. QCSCS 1 Quality Control for Audit Firms Engagement Quality Control Review The firm is required to establish policies and procedures requiring for all audit engagements an engagement quality control review, unless certain conditions are met (see paragraphs 34, 34-2 and 41-2, on pages 22 to 24 and 26). Change of Auditors QCSCS 1 included 2 requirements that required the firm to establish policies and procedures regarding the communication between the predecessor and successor auditors when there has been a change of auditors, and evaluate whether such communication are in accordance with its policies and procedures (see paragraphs 59 and 60, on page 31). Based on the Fraud Risk Standard, one requirement is added (see paragraph 60-2 on page 31). Joint Audit QCSCS 1 includes one requirement regarding joint audit (see paragraph 61 on page 31 to 32). ASCS 510 Initial Audit Engagements Opening Balances ASCS 510 includes an additional requirement to hold a discussion among the entity, predecessor auditor and the current auditor when possible material misstatement is identified in opening balances (see pages 64 to 65). ASCS 900 Change of Auditors ASCS 900 deals with the auditor s responsibilities regarding the communication between the predecessor and the successor auditors when there has been a change of auditors. 6

10 I. Overview of Japanese GAAS 4.2 Other Modifications to the requirements In developing clarity ASCSs and QCSCS 1, the meaning of the original text of ISAs and ISQC 1 was maintained in ASCSs and QCSCS 1, except for minimum modifications. The following are modifications made throughout the ASCS clarity project, in order to reflect the local regulatory environment. Deletion of references to true and fair view throughout ASCSs. In Japan, the audit opinion refers to fair presentation, and true and fair view is not used in practice. Deletion of the phrase where appropriate, those charged with governance in some cases, if it is not applicable for Japanese companies incorporated under the Companies Act of Japan. Deletion of the phrase where withdrawal is possible under applicable law or regulation because, under the Japanese law, there is no restriction on withdrawal from an engagement.. Change of references, from IESBA Code of Ethics for Professional Accountants to JICPA Code of Ethics and Guidance on Independence. Certain modifications to ISAs were made in order to eliminate certain options not applicable in Japan, or to slightly change the meaning of the original ISAs in the context of the local regulatory and legal environment. Also, the transitional measure was made for paragraphs 18 to 21 of ISA 210 (see II. D on pages 61 to 63.). In addition, the application and other explanatory material under the heading Considerations Specific to Public Sector Entities has not been included in ASCSs and QCSCS 1. 7

11 A. QCSCS 1 Part of the Excerpts of ASCSs and QCSCS 1 A. Provisional Translation of Introduction, Objective, Definitions and Requirements Sections in QCSCS 1 (Revised) Quality Control for Audit Firms : This is the provisional translation of all requirements together with Introduction, Objective and Definitions sections in QCSCS 1 (Revised), published on June 17, The explanations regarding respective columns are as follows: The column (ISQC 1) refers to the equivalent paragraph number in ISQC 1. No (ISA) and (ASCS) is not the same number since the JICPA pronouncements include the Effective Date section at the end of the pronouncements. The mark up shows the change from the ISQC 1. In addition, the revisions based on the Fraud Risk Standard are highlighted in yellow. (i.e. the paragraphs marked up with yellow highlight are the modifications to reflect the Fraud Risk Standard, and the paragraphs marked up without yellow highlight are the differences that do not relate to the Fraud Risk Standard) (ISQC 1) (QCS CS 1) Introduction 1 1 QCSCS 1 (Revised) Scope of this QCSCS ISQC (*1) This Quality Control Standards Committee Statement (QCSCS) International Standard on Quality Control (ISQC) deals with a firm s responsibilities for its system of quality control for audits and reviews of financial statements, audits of semi-annual financial statements, reviews of quarterly financial statements and audits of internal controls over financial reporting performed by the entity s auditors and other assurance and related services engagements. The audit of semi-annual financial statements and the review of quarterly financial statements are performed in connection with the financial statement audit. Also, the audit of internal controls over financial reporting is performed integrally with the financial statement audit. Therefore, the firm establishes and maintains the system of quality control for audits of semi-annual financial statements, reviews of quarterly financial statements, and audits of internal controls over 8 (*1 ): Some modifications were made to paragraphs 1 and 2 to explain the applicability of QCSCS 1 in the context of the specific engagements that are existing in Japanese practice, and for which the subject-matter specific Statements have been established by the JICPA.

12 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 financial reporting, as part of the system of quality control for audits of financial statements. Special considerations for these engagements are provided in application and other explanatory materials as necessary. In addition, this QCSCS applies to firms that perform: (a) Assurance engagements in accordance with Auditing and Assurance Practice Committee Statement 86 (*2):Equivalent to ISAE Assurance Reports on Controls at a Service 3402 Organization(*2) (b) Other engagements for which relevant JICPA Statements require the firm to comply with this QCSCS. This QCSCS ISQC is to be read in conjunction with relevant ethical requirements. N/A 1-2 This QCSCS includes the requirements and relevant application and other explanatory materials that are only applicable for the firm which conducts the audit engagements to which the Standard to Address Risks of Fraud in an Audit ( The Fraud Risk Standard ) applies. They are identified by adding the letter F at the beginning of the paragraph number. (Ref: A1) 2 2 Other pronouncements of the International Auditing and Assurance Standards Board (IAASB) set out additional standards and guidance on the responsibilities of firm personnel regarding quality control procedures for specific types of engagements. ASCS ISA 220, for example, deals with quality control procedures for audits of financial statements.(*) (*): Please see on paragraph 1 above. 3 3 A system of quality control consists of policies designed to achieve the objective set out in paragraph and the procedures necessary to implement and monitor compliance with those policies. 4 4 Authority of this QCSCS ISQC This QCSCS ISQC applies to all firms of professional accountants in respect of the engagements specified in paragraph 1 audits and reviews of financial statements, and other assurance and related services engagements. The nature and extent of the policies and procedures developed by an individual firm to comply with this QCSCS ISQC will 9

13 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 depend on various factors such as the size and operating characteristics of the firm, and whether it is part of a network. 5 5 This QCSCS ISQC contains the objective of the firm in following the QCSCS ISQC, and requirements designed to enable the firm to meet that stated objective. In addition, it contains related guidance in the form of application and other explanatory material, as discussed further in paragraph 8, and introductory material that provides context relevant to a proper understanding of the QCSCS ISQC, and definitions. 6 6 The objective provides the context in which the requirements of this QCSCS ISQC are set, and is intended to assist the firm in: Understanding what needs to be accomplished; and Deciding whether more needs to be done to achieve the objective. 7 7 The requirements of this QCSCS ISQC are expressed using shall. 8 8 Where necessary, the application and other explanatory material provides further explanatory of the requirements and guidance for carrying them out. In particular, it may: Explain more precisely what a requirement means or is intended to cover; and Include examples of policies and procedures that may be appropriate in the circumstances. While such guidance does not in itself impose a requirement, it is relevant to the proper application of the requirements. The application and other explanatory material may also provide background information on matters addressed in this QCSCS ISQC. Where appropriate, additional considerations specific to public sector audit organizations or (*) smaller firms are included within the application and other explanatory material. These additional considerations assist in the application of the requirements in this QCSCS ISQC. They do not, however, limit or reduce the responsibility of the firm to apply and comply with the requirements in this QCSCS ISQC. (*): The application and other explanatory material under the heading Considerations Specific to Public Sector Entities has not been included in ASCSs and QCSCS 1. Please see Part I 4.2 Other Modifications to the requirements, on page 7. 10

14 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) 9 9 This QCSCS ISQC includes, under the heading Definitions, a description of the meanings attributed to certain terms for purposes of this QCSCS ISQC. These are provided to assist in the consistent application and interpretation of this QCSCS ISQC, and are not intended to override definitions that may be established for other purposes, whether in law, regulation or otherwise. Auditing Standards Committee Statements The Glossary of Terms relating to International Standards issued by the IAASB in the Handbook of International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements published by IFAC includes the terms defined in this QCSCS ISQC. It also includes descriptions of other terms found in this QCSCS ISQC to assist in common and consistent interpretation and translation. (*) A. QCSCS 1 (*): The Glossary of Terms included in Preface to Auditing Standards Committee Statements contains a complete listing of terms defined in this QCSCS. Objective The objective of the firm is to establish and maintain a system of quality control to provide it with reasonable assurance that: (a) The firm and its personnel comply with professional standards and applicable legal and regulatory requirements; and (b) Reports issued by the firm or engagement partners are appropriate in the circumstances. Definitions In this QCSCS ISQC, the following terms have the meanings attributed below: (a) (a) Date of report The date selected by the practitioner to date the report. (b) (b) Engagement documentation The record of work performed, results obtained, and conclusions the practitioner reached (terms such as working papers or workpapers are sometimes used). (c) (c) Engagement partner The partner or other person in the firm who is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body(*). (*):This phrase was deleted, because this condition is not relevant in Japanese environment. 11

15 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) (d) (d) Engagement quality control review A process designed to provide an objective evaluation, on or before the date of the report, of the significant judgments the engagement team made and the conclusions it reached in formulating the report. The engagement quality control review process is for audits of financial statements of listed entities, and those other engagements, if any, for which the firm has determined an engagement quality control review is required.(*) A. QCSCS 1 (*):In Japan, the firm is required to establish policies and procedures requiring for all audit engagements engagement an quality control review, unless the firm decides to use the requirement in paragraph Please see paragraphs 34, 34-2 and 41-2 below. (e) (e) Engagement quality control reviewer A partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, none of whom is part of the engagement team, with sufficient and appropriate experience and authority to objectively evaluate the significant judgments the engagement team made and the conclusions it reached in formulating the report. (f) (f) Engagement team All partners and staff performing the engagement, and any individuals engaged by the firm or a network firm who perform procedures on the engagement. This excludes external experts engaged by the firm or a network firm. (g) (g) Firm A sole practitioner, partnership or corporation or other entity of professional accountants. (h) (h) Inspection In relation to completed engagements, procedures designed to provide evidence of compliance by engagement teams with the firm s quality control policies and procedures. (i) (i) Listed entity An entity whose shares, stock or debt are quoted or listed on a recognized stock exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent body. Large company, etc. (public interest entity) (a) A listed entity; and (b) An entity: The Certified Public Accountants Act, Japanese legislation governing CPAs and auditor activities, stipulates the rotation rule for audits of financial 12

16 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 (i) For which the audit is required by regulation or statements of large legislation to be conducted in compliance with the company, etc.. Large same independence requirements that apply to the company, etc. includes audit of listed entities; or listed entities. (ii) Which the firm determined to treat as a large Regarding EQCR, please company, etc. in accordance with Section I paragraph see on paragraph 26 of JICPA Guidance on Independence. 12(d). In Japan, Certified Public Accountants Act defines large company, etc. as those companies which meet (a) and (b)(i) above. (j) (j) Monitoring A process comprising an ongoing consideration and evaluation of the firm s system of quality control, including a periodic inspection of a selection of completed engagements, designed to provide the firm with reasonable assurance that its system of quality control is operating effectively. (k) (k) Network firm A firm or entity that belongs to a network. (l) (l) Network A larger structure: (i) That is aimed at cooperation, and (ii) That is clearly aimed at profit or cost-sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand name, or a significant part of professional resources. (m) (m) Partner Any individual with authority to bind the firm with respect to the performance of a professional services engagement. (n) (n) Personnel Partners and staff. (o) (o) Professional standards and applicable legal and regulatory requirements IAASB Engagement Standards, as defined in the IAASB s Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services, and relevant ethical requirements. Standards and applicable legal and regulatory requirements that the practitioner is required to be comply with when performing a professional services engagement. This includes, among other things, the Auditing Standards, the Fraud Risk Standard (*): The definition of Professional standards is modified to reflect Japanese environment. 13

17 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 (when required by applicable law), the Auditing Standards Committee Statements, the Standard on Quality Control for Audits, the Quality Control Standards Committee Statement, the Certified Public Accountants Act, the Order for Enforcement of the Certified Public Accountants Act, the Ordinance for Enforcement of the Certified Public Accountants Act, the Financial Instruments and Exchange Act, the Companies Act, the JICPA Constitution, the JICPA Code of Ethics, and other Statements.(*) (p) (p) Reasonable assurance In the context of this ISQC, a high, but not absolute, level of assurance. (q) (q) Relevant ethical requirements Ethical requirements to which the engagement team and engagement quality control reviewer are subject, which comprise the Certified Public Accountants Act, the Order for Enforcement of the Certified Public Accountants Act, the Ordinance for Enforcement of the Certified Public Accountants Act, the JICPA Constitution, the JICPA Code of Ethics, the Guidance on Independence, and other ethical requirements Parts A and B of the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code) together with national requirements that are more restrictive. (r) (r) Staff Professionals, other than partners, including any experts (i.e. individual possessing expertise in a field other than accounting or auditing) (*) the firm employs. The definition of reasonable assurance is not included in QCSCS 1, because in Japan, the term reasonable assurance is defined in the context of explaining the types of assurance engagement (i.e. reasonable assurance engagement vs. limited assurance engagement ). (*): Modification to the definition of Relevant ethical requirements was made to reflect Japanese environment. (*): Added the explanation regarding the expert. (s) (s) Suitably qualified external person An individual outside the (*): Deleted the examples 14

18 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 firm with the competence and capabilities to act as an that are not common in engagement partner, for example, a partner of another firm, or Japan. an employee (with appropriate experience) of either a professional accountancy body whose members may perform audits and reviews of historical financial information, or other assurance or related services engagements, or of an organization that provides relevant quality control services.(*) Requirements Applying, and Complying with, Relevant Requirements Personnel within the firm responsible for establishing and maintaining the firm s system of quality control shall have an understanding of the entire text of this QCSCS ISQC, including its application and other explanatory material, to understand its objective and to apply its requirements properly The firm shall comply with each requirement of this QCSCS ISQC unless, in the circumstances of the firm, the requirement is not relevant to the services provided in respect of the engagements specified in paragraph 1 audits and reviews of financial statements, and the other assurance and related services engagements. (Ref: A1) The requirements are designed to enable the firm to achieve the objective stated in this QCSCS ISQC. The proper application of the requirements is therefore expected to provide a sufficient basis for the achievement of the objective. However, because circumstances vary widely and all such circumstances cannot be anticipated, the firm shall consider whether there are particular matters or circumstances that require the firm to establish policies and procedures in addition to those required by this QCSCS ISQC to meet the stated objective Elements of a System of Quality Control The firm shall establish and maintain a system of quality control that includes policies and procedures that address each of the following elements: (a) Leadership responsibilities for quality within the firm. (b) Relevant ethical requirements. (c) Acceptance and continuance of client relationships and 15

19 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 specific engagements. (d) Human resources. (e) Engagement performance. (f) Monitoring. N/A F15-2 The firm shall establish appropriate quality control policies and procedures taking into consideration the risks of fraud The firm shall document its policies and procedures and communicate them to the firm s personnel. (Ref: A2 A3) Leadership Responsibilities for Quality within the Firm The firm shall establish policies and procedures designed to promote an internal culture recognizing that quality is essential in performing engagements. Such policies and procedures shall require the firm s chief executive officer (or equivalent) or, if appropriate, the firm s managing board of partners (or equivalent) to assume ultimate responsibility for the firm s system of quality control. (Ref: A4 A5) The firm shall establish policies and procedures such that any person or persons assigned operational responsibility for the firm s system of quality control by the firm s chief executive officer or managing board of partners has sufficient and appropriate experience and ability, and the necessary authority, to assume that responsibility. (Ref: A6) N/A F The Person Responsible for Quality Control to Address Risks of Fraud The firm shall appoint a person responsible for quality control to address the risks of fraud. (Ref: FA6-2) Relevant Ethical Requirements The firm shall establish policies and procedures designed to provide it with reasonable assurance that the firm and its personnel comply with relevant ethical requirements. (Ref: A7 A10) Independence The firm shall establish policies and procedures designed to provide it with reasonable assurance that the firm, its personnel and, where applicable, others subject to independence requirements (including network firm personnel) maintain independence where required by relevant 16

20 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 ethical requirements. Such policies and procedures shall enable the firm to: (Ref: A10) (a) Communicate its independence requirements to its personnel and, where applicable, others subject to them; and (b) Identify and evaluate circumstances and relationships that create threats to independence, and to take appropriate action to eliminate those threats or reduce them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the engagement, where withdrawal is possible under applicable law or regulation Such policies and procedures shall require: (Ref: A10) (a) Engagement partners to provide the firm with relevant information about client engagements, including the scope of services, to enable the firm to evaluate the overall impact, if any, on independence requirements; (b) Personnel to promptly notify the firm of circumstances and relationships that create a threat to independence so that appropriate action can be taken; and (c) The accumulation and communication of relevant information to appropriate personnel so that: (i) The firm and its personnel can readily determine whether they satisfy independence requirements; (ii) The firm can maintain and update its records relating to independence; and (iii) The firm can take appropriate action regarding identified threats to independence that are not at an acceptable level The firm shall establish policies and procedures designed to provide it with reasonable assurance that it is notified of breaches of independence requirements, and to enable it to take appropriate actions to resolve such situations. The policies and procedures shall include requirements for: (Ref: A10) (a) Personnel to promptly notify the firm of independence breaches of which they become aware; (b) The firm to promptly communicate identified breaches of these policies and procedures to: 17

21 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 (i) The engagement partner who, with the firm, needs to address the breach; and (ii) Other relevant personnel in the firm and, where appropriate, the network, and those subject to the independence requirements who need to take appropriate action; and (c) Prompt communication to the firm, if necessary, by the engagement partner and the other individuals referred to in subparagraph 22(b)(ii) of the actions taken to resolve the matter, so that the firm can determine whether it should take further action At least annually, the firm shall obtain written confirmation of compliance with its policies and procedures on independence from all firm personnel required to be independent by relevant ethical requirements. (Ref: A10 A11) The firm shall establish policies and procedures: (Ref: A10, A12-A14) (a) Setting out criteria for determining the need for safeguards to reduce the familiarity threat to an acceptable level when using the same senior personnel on an assurance engagement over a long period of time; and (b) Requiring, for audits of financial statements of listed entities large companies, etc.(*), the rotation of the engagement partner and the individuals responsible for engagement quality control review, and, where applicable, others subject to rotation requirements, after a specified period in compliance with relevant ethical requirements. (*): The Certified Public Accountants Act, Japanese legislation governing CPAs and auditor activities, stipulates the rotation rule for audits of financial statements of large company, etc. Large company, etc. includes listed entity. Please see 12(i) above Acceptance and Continuance of Client Relationships and Specific Engagements The firm shall establish policies and procedures for the acceptance and continuance of client relationships and specific engagements, designed to provide the firm with reasonable assurance that it will only undertake or continue relationships and engagements where the firm: (a) Is competent to perform the engagement and has the capabilities, including time and resources, to do so; (Ref: A15) 18

22 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 (b) Can comply with relevant ethical requirements; and (c) Has considered the integrity of the client, and does not have information that would lead it to conclude that the client lacks integrity. (Ref: A16-A17) Such policies and procedures shall require: (a) The firm to obtain such information as it considers necessary in the circumstances before accepting an engagement with a new client, when deciding whether to continue an existing engagement, and when considering acceptance of a new engagement with an existing client. (Ref: A18) (b) If a potential conflict of interest is identified in accepting an engagement from a new or an existing client, the firm to determine whether it is appropriate to accept the engagement. (c) If issues have been identified, and the firm decides to accept or continue the client relationship or a specific engagement, the firm to document how the issues were resolved. N/A F Considerations of Risks of Fraud in the Acceptance and Continuance of Audit Engagement The firm shall establish policies and procedures for the acceptance and continuance of audit engagements, which include the evaluation of risks relating to the acceptance and continuance of the audit engagement considering the risks of fraud. The policies and procedures shall also require that the evaluation be reviewed by an appropriate department or person outside the engagement team. The review is required for the acceptance of all new engagements, however, depending on the risks identified, a review is not necessarily required for the continuance of an engagement. (Ref: FA17-2) Obtaining Information that would Have Caused it to Decline the Engagement Had that Information been Available Earlier The firm shall establish policies and procedures on continuing an engagement and the client relationship, addressing the circumstances where the firm obtains information that would have caused it to decline the engagement had that information 19 Addition of the sub-heading only.

23 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 been available earlier. Such policies and procedures shall include consideration of: (a) The professional and legal responsibilities that apply to the circumstances, including whether there is a requirement for the firm to report to the person or persons who made the appointment or, in some cases, to regulatory authorities; and (b) The possibility of withdrawing from the engagement or from both the engagement and the client relationship. (Ref: A19) N/A F Human Resources The firm shall establish policies and procedures designed to provide it with reasonable assurance that it has sufficient personnel with the competence, capabilities, and commitment to ethical principles necessary to: (a) Perform engagements in accordance with professional standards and applicable legal and regulatory requirements; and (b) Enable the firm or engagement partners to issue reports that are appropriate in the circumstances. (Ref: A20 A25) Education and Training concerning Fraud The firm shall establish policies and procedures for education and training to provide appropriate opportunities for firm personnel to receive education and training concerning fraud, including training seminars within or outside the firm. The education and training will enable personnel to gain knowledge on the instances of frauds and to develop skills to perform the audit procedures related to fraud. Assignment of Engagement Teams The firm shall assign responsibility for each engagement to an engagement partner and shall establish policies and procedures requiring that: (a) The identity and role of the engagement partner are communicated to key members of client management and those charged with governance; (b) The engagement partner has the appropriate competence, capabilities, and authority to perform the 20

24 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 role; and (c) The responsibilities of the engagement partner are clearly defined and communicated to that partner. (Ref: A26) The firm shall also establish policies and procedures to assign appropriate personnel with the necessary competence, and capabilities to: (a) Perform engagements in accordance with professional standards and applicable legal and regulatory requirements; and (b) Enable the firm or engagement partners to issue reports that are appropriate in the circumstances. (Ref: A27) Engagement Performance The firm shall establish policies and procedures designed to provide it with reasonable assurance that engagements are performed in accordance with professional standards and applicable legal and regulatory requirements, and that the firm or the engagement partner issue reports that are appropriate in the circumstances. Such policies and procedures shall include: (a) Matters relevant to promoting consistency in the quality of engagement performance; (Ref: A28-A29) (b) Supervision responsibilities; and (Ref: A30) (c) Review responsibilities. (Ref: A31) The firm s review responsibility policies and procedures shall be determined on the basis that work of less experienced team members is reviewed by more experienced engagement team members. N/A F32-2 Change of All of the Engagement Partners within the Engagement Team The firm shall establish policies and procedures for quality control of the engagement performance requiring significant matters arising from the audit, including the risks of fraud, be appropriately communicated between the predecessor and the successor engagement partners when there has been a change of all of the engagement partners within the 21

25 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 engagement team. N/A F N/A F Supervision and Review of the Audit Work in Order to Properly Address the Risks of Fraud The firm shall establish policies and procedures for supervision and review of the audit work in order to properly address the risks of fraud. Consultation The firm shall establish policies and procedures designed to provide it with reasonable assurance that: (a) Appropriate consultation takes place on difficult or contentious matters; (b) Sufficient resources are available to enable appropriate consultation to take place; (c) The nature and scope of, and conclusions resulting from, such consultations are documented and are agreed by both the individual seeking consultation and the individual consulted; and (d) Conclusions resulting from consultations are implemented. (Ref: A32 A36) Consultation When the Auditor has Identified a Circumstance that Indicates the Possibility of a Material Misstatement Due to Fraud, or the Auditor Has Determined that a Suspicion of a Material Misstatement Due to Fraud Exists The firm shall establish policies and procedures for consultation so that the members of the engagement team undertake consultation with others at the appropriate level within or outside the firm as necessary, when the auditor has identified a circumstance that indicates the possibility of a material misstatement due to fraud or the auditor has determined that a suspicion of a material misstatement due to fraud exists. (Ref: FA35-2) Engagement Quality Control Review (Ref: A46) The firm shall establish policies and procedures requiring for all audit appropriate engagements (unless the firm decides to use the requirement in paragraph 34-2), an engagement quality control review that provides an objective evaluation of the significant judgments made by the engagement team and 22

26 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 the conclusions reached in formulating the report. (Ref: A37) Such policies and procedures shall: (a) Require an engagement quality control review for all audits of financial statements of listed entities; (b) Set out criteria against which all other audits and reviews of historical financial information and other assurance and related services engagements shall be evaluated to determine whether an engagement quality control review should be performed; and (Ref: A41) (c) Require an engagement quality control review for all engagements, if any, meeting the criteria established in compliance with subparagraph 35(b). N/A 34-2 The firm is permitted to establish policies and procedures not requiring an engagement quality control review for the following engagements: (a) Statutory audit of an incorporated educational institution in accordance with Private Educational Institution Promotion Subsidy Act, provided that the audited institution founded kindergartens only; and/or (b) Voluntary audit, provided that the effect of the audited financial statements to the public and users of the audit reporting is limited. Nevertheless, the firm shall carefully consider whether an engagement quality control review should be performed for such engagements in the following circumstances. (Ref: A37) (a) The use of an engagement quality control review may be effective as a safeguard to the identified threat to independence; (b) There are significant qualitative aspects of the entity s accounting practices, including accounting policies, accounting estimates and financial statement disclosures that may have implication on the audit opinion (see paragraph 14(a) of ASCS 260(*1)); (c) The auditor encountered significant difficulties (see paragraph 14(b) of ASCS 260(*2)); (d) There are significant matters arising from the audit that (*1): Equivalent to paragraph 16(a) of ISA 260 (*2): Equivalent to paragraph 16(b) of ISA

27 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 were discussed, or subjects to correspondence with (*3): Equivalent to management, that may have implication on the audit paragraph 16(c) of ISA opinion (see paragraph 14(c) of ASCS 260(*3)); 260 (e) There are significant transactions with related parties who (*4): Equivalent to have dominant influence (see paragraph 18 of ASCS paragraph 19 of ISA (*4)); or (f) Events or conditions have been identified that may cast significant doubt on the entity s ability to continue as a going concern. (see paragraph 15 of ASCS 570(*5)) (*5): Equivalent to The scope of audit engagements which are not to be subject paragraph 16 of ISA 570 to an engagement quality control review, including above criteria, shall be clearly set out in the policies and procedures for engagement quality control review The firm shall establish policies and procedures setting out the nature, timing and extent of an engagement quality control review. Such policies and procedures shall require that the engagement report not be dated until the completion of the engagement quality control review. (Ref: A38 A39) The firm shall establish policies and procedures to require the engagement quality control review to include: (Ref: A40) (a) Discussion of significant matters with the engagement partner; (Ref: FA 40-2) (b) Review of the financial statements or other subject matter information and the proposed report; (c) Review of selected engagement documentation relating to significant judgments the engagement team made and the conclusions it reached (Ref: FA 40-2); and (d) Evaluation of the conclusions reached in formulating the report and consideration of whether the proposed report is appropriate For audits of financial statements of listed entities, tthe firm shall establish policies and procedures to require the engagement quality control review to also include consideration of the following: (a) The engagement team s evaluation of the firm s independence in relation to the specific engagement; (b) Whether appropriate consultation has taken place on matters involving differences of opinion or other difficult or 24

28 (ISQC 1) (QCS CS 1) QCSCS 1 (Revised) A. QCSCS 1 contentious matters, and the conclusions arising from those consultations; and (c) Whether documentation selected for review reflects the work performed in relation to the significant judgments and supports the conclusions reached. (Ref: A41) N/A F N/A F Engagement Quality Control Review When the Auditor Has Determined That a Suspicion of a Material Misstatement Due to Fraud Exists The firm shall establish policies and procedures requiring an engagement quality control review to be conducted as to whether the revision of the risk assessment and the modification of the further audit procedures are appropriate, and whether sufficient appropriate audit evidence has been obtained, when the auditor has determined a suspicion of material misstatement due to fraud exists. (Ref: FA41-2) Criteria for the Eligibility of Engagement Quality Control Reviewers The firm shall establish policies and procedures to address the appointment of engagement quality control reviewers and establish their eligibility through: (a) The technical qualifications required to perform the role, including the necessary experience and authority; and (Ref: A42) (b) The degree to which an engagement quality control reviewer can be consulted on the engagement without compromising the reviewer s objectivity. (Ref: A43) Engagement Quality Control Reviewer When the Auditor has Determined That Suspicion of a Material Misstatement Due to Fraud Exists The firm shall establish policies and procedures regarding the appointment of qualified engagement quality control reviewer with sufficient and appropriate experience, authority and other qualifications that is responsive to the relevant suspicion. (Ref: FA42-2) The Objectivity of the Engagement Quality Control Reviewer The firm shall establish policies and procedures designed to maintain the objectivity of the engagement quality control Addition of the sub-heading only. 25